F&C sounds the alarm on smaller mining operators

In a report published today, F&C has outlined the risks to mining companies from failure to apply environmental, social and governance (ESG) practices to their independently-managed operations.

According to Karina Litvack, Head of the Governance and Sustainable Investment team at F&C, although most major mining companies have recognised that effective management of these risks is crucial to the long-term success of their business, they have not consistently applied the same policies to their joint-ventures and other partial investments.

"Over the last few years, we have become aware of the gap between what mining companies do in-house in terms of ESG best practices and what they do, or don't do, in to their so-called 'independently managed operations'. Whilst many of these companies have led the way when it comes to their in-house operations, the same cannot be said of the independently-managed operators with which they are increasingly involved.

"The usual argument is that these projects are too small, and there are too many of them, to justify a full-scale risk management programme, but our research suggests that by assuming that these small operators 'fly below the radar', the majors could be storing up real problems for the future," said Litvack.

The report highlights how rising demand for ever-scarcer resources is driving mining companies to turn to exploration projects that are increasingly located in high-risk areas, such as the former Soviet Union, Latin America and Africa.

It is the inherently risky nature of these locations that often prompts the majors to outsource these projects to smaller or more nimble partners. Later on, if and when the assets prove very profitable, the majors will often buy out their junior partners.

"It is at this crucial moment that companies could find themselves in hot water if the ESG risks have not been managed from the outset, whereas early preventive action might have saved them the trouble of cleaning up so-called 'legacy problems'," added Litvack.

"By not managing the ESG risks you are effectively arming a ticking bomb that could explode at any moment. Long-standing resentment and discontent in local communities can, in the worst cases, come to a head and result in angry mobs forcing a mine shut-down or environmental remedies that are not only costly but damage the acquiring company's reputation, and thus its ability to access reserves and capital in the future," she said.

Although there is no magic bullet to resolve these issues, F&C has developed a set of recommendations to help mining majors tackle these long-term issues.

"First and foremost, we ask that companies ensure that all their policies clearly reference independently-managed operations, and demonstrate that these policies are being put into practice through clear reporting. We also recommend that prior to committing to any projects, companies undertake detailed due diligence in respect of the potential partner and weigh up the risks with the benefits of launching the venture.

"As independently-managed operations become an increasingly common growth strategy for majors and juniors alike, due diligence on such corporate transactions should routinely address ESG management practices alongside other business-critical operational capabilities", she concluded.